tv CNN Student News HLN October 30, 2009 4:00am-4:10am EDT
growth will bring jobs, but we need to continue working together to strengthen the recovery and create the conditions where businesses will invest again and all americans will have the confidence that they can provide for their families, send their kids to college, feel security in retirement.@@@@@@,!bá to bring basic oversight to hedge funds and other unregulated activities.
today you carry this momentum forward. one of the most searing lessons of last fall is no financial system can work if institutions and investors assume that the government will protect them from the consequences of failure. never again should taxpayers be put in the position of having to pay for the losses of private institutions. we need to build a system in which individual firms no matter how large or important, can fail without risking catastrophic damage to the economy. now last june we outlined a comprehensive set prove posals to achieve this goal. there's been a lot of work by this committee and many others since then. chairman's introduced new legislation to accomplish that. we believe any effective set of reforms has to have five key elements. i'm going to outline those very, very quickly, but the legislation in our judgment meets that test. first test is the government has to have the ability to resolve failing major financial institutions in an orderly manner with losses absorbed not by taxpayers, but by equity
holders and by unsecured creditors. in all but the rarest case, bankruptcy will remain the dominant tool for handling financial failure. but as the collapse of lehman brothers demonstrates, the bankruptcy code is not an efective tool for resolving the failure of complicated global financial institutions in times of severe stress. now under the proposals we've provided, which are very similar to what already exist for banks and thrifts, a failing firm will be placed into an fdic manager receivership so they can be unwound, dismansled, sold or liquidated in an orderly way. managers responsible for failure would be replaced. a second key element of reform. any individual firm that puts itself in the position where it cannot survive without special assistance from the government must face the consequence of that failure. that's why this proposed resolution authority would be limited to facilitating the orderly denies of the failing
firm, not ensuring its survival. it's not about redemption for the firm that makes mistakes. it's about unwinding them in a way that doesn't cause catastrophic damage. taxpayers must not be on the hook for losses resulting from failure and subsequent resolution of a large financial firm. the government should have the authority as it now does when we resolve small banks and thrifts. the government should have the authority to recoup any losses by assessing a fee on other financial institutions. these assessments should be stretched out over time as necessary to avoid amplifying, adding to the pressures you face in crisis. fourth key point. the -- i want to empsigh this. the emergency authorities now grant to the federal reserve and the fdic should be limited. so they are subject to appropriate checks and balances and can be only used to protect the system as a whole. final element. the government has to have stronger supervisory and
regulatory authority over these major firms. they need to be empowered with explicit authority to force major institutions to reduce their size or restrict the scope of their activities. where that is necessary to reduce risk to the system and this is a critically important tool. we do not now have at present. regulators must be able to impose tougher requirements, most critically, stronger capital rules, more stringent liquidity requirements that reduce the probability that major financial institutions in the future would take on a scale of size and leverage that can threaten the stability of the financial system. this would provide strong incentives for firms to shrink to simplify to reduce leverage. we have to close loop holes, reduce possibilities for gaming the system for avoiding these strong standards. monitoring threats to stability will fall to the responsibility of this new financial services oversight council, the council would have the obligation and the authority to identify any firm whose size and leverage and complexity creates the risk to
the system as a whole and needs to be subject to heightened stronger standards -- stronger constraints on leverage. and the federal reserve -- and under this model would oversee individual financial firms so it's a clear, inescapable single point of accountability. the fed already provides this rule for major banks, bank holding companies, but it needs to provide the role for any firm that creates that potential risk to the system as a whole. the rules in place today are inadequate and they are outdated. we have all seen what happens when an n a crisis the government is left with inadequate tools to respond. that's the searing lesson of last fall. in today's markets, capital moves at speeds unimaginable. when the system was created more than 90 years ago, and today's economy given these risks requires we bring that framework into the 21st century. the bill before the committee does that. it's a comprehensive coordinated answer to the moral hazard problem. we're also concerned about. what it does not do is provide a
government guarantee for troubled financial firms. it does not create a fixed list of systemically important firms. does not create permanent t.a.r.p. authority. and it does not give the government broad discretion to step in and rescue insolvent firms. now we're looking forward. we're looking to make sure we provide future administrations and future congresss with better options than existed last year. this is still an extremely sensitive moment for the financial system. investors around the -- across the country and around the world are watching carefully your deliberations, oury did bait, our discussions. i want to make sure they understand that these reforms were proposing the crises about the future. while we work to repair the damage still caused by the current crisis. now the american people are counting on us to get this right and to get this done. i want to compliment you again for the enormous progress you made lrksd and i look forward to working with you, continuing to work with you to produce this strong package of reforms. thank you, mr. chairman.
>> i'm going to begin and use my five minutes essentially to make some points. i know there will be no dirth of questions, mr. secretary. i will not be asking you any questions. i do not feel you'll be ignored by the end of this morning. first, let me address the timing issue. the ideas that we are talking about here really were first formulated for major public debate by former treasury secretary paulson in april of 2008. and they have been under serious discussion since then. various versions have gone forward. this particular draft reflecting a lot of conversations, a lot of people have had, was recently released. we won't get to marking it up until next week. and that's probably not until wednesday now because we have a couple of things to finish up from tuesday. the argument that we should wait, i think, i think we are more open to the criticism that we haven't moved quickly enough, rather than we are moving too
quickly. there was a paralysis in the financial system, but that is happily ending, and we don't want to get behind that curve. second, i want to address the question of fannie mae and freddie mac. i am astounded by the notion we have to regulate them. we did. in 2007, as chairman of this committee, i made as our first major order of business adopting the regulation of fannie mae and freddie mac that the bush administration wanted. we did that in the house. we did not get prompt action in the senate. surprisingly. and when the first stimulus bill came up in january of 2008, i argued they take our fannie and freddie reform and make it part of the bill. they weren't able to get agreement to do it. the senate did act on our reform in 2008, too late to stall off the crisis. but the sfact the fannie and freddie that exist today are already the ones that were strictly regulated. now they have collapsed. they are not acting as they did
before. it is important for us going forward to totally revise the functions of the secondary market and whether or not subsidy should be a part of that and that certainly will be on our agenda next year. fannie and freddie are not out there. "a," they are subject to regulation. "b" there's a case of collapse. part of this debate suffers from partisan lag. i want to talk about the comparison between this year and last year. in the events leading up to the collapse of last year, there was no regulation of subprime lending. a major contributing factor. we adopted legislation to control subprime lending in the house. it didn't get enacted in the senate. we have that as part of this bill. we will not have the unrestricted, unregulated responsible subprime lending that led in part to the collapse because so many of the securities that fell apart were